Can The Apple Bull Run Continue?

by Trefis Team
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Apple‘s (NASDAQ:AAPL) stock has risen by over 45% year-to-date to about $170 per share, outperforming both the S&P 500 as well the technology indexes. In this note, we take a look at what has driven the rally and why we believe there may be room for further upside.

We have a $180 price estimate for Apple, which is slightly ahead of the market price.

See Our Complete Analysis For Apple Here

iPhone Optimism

While the rally has been driven by multiple factors, increased optimism surrounding the iPhone business – which accounts for over 60% of Apple’s revenues – has been the biggest driver. Although iPhone shipment growth has been mixed over the last two years, things are expected to get better this fiscal year, with the company launching a trio of new smartphones this fall, including the completely redesigned iPhone X. We expect iPhone shipments to rise by about 10% this fiscal year, with more moderate growth going forward. Moreover, customer loyalty remains for the iPhone remains strong, driven by Apple’s growing product and service ecosystem. For instance, Morgan Stanley estimated a loyalty rate of 92% for iPhone, up from 86% a year-ago. This is well ahead of other vendors such as Samsung (77%) and LG (59%). This is likely causing investors to view Apple’s stock as having a lower risk profile, leading its P/E multiple to expand over the last year.

The stock could see further gains for two broad reasons. Firstly, Apple has scope to improve its earnings. The company has been increasing prices of its flagship iPhones, with the newest models starting at $1,000, allowing ASPs to increase.The services business will also be a big driver of earnings. Services as a percentage of overall revenues have increased from 9% to 13% over the last 4 years. We project it will approach 20% levels by 2020.  EPS growth should outpace broader earnings growth considering Apple’s share buyback program.

Moreover, Apple’s P/E multiple remains depressed compared to the broader market, with a forward P/E of 14.5x versus about 19.5x for the S&P and 21.5 for the NASDAQ. Apple’s P/E, adjusted for its sizeable net cash position, stands at just about 12x.

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